Indonesia Mining Law Revision Boosts Local Governments Power

Excavators operate in the open pit coal mine at the PT Exploitasi Energi Indonesia operations in Asam-Asam, South Kalimantan, Indonesia. Photographer: Dadang Tri/Bloomberg

Nov. 23 (Bloomberg) -- Indonesia’s Constitutional Court
granted greater power to local administrations to designate
areas for mining by amending some articles in the 2009 Mining
Law, according to a ruling announced yesterday.

The court revised article 6, point 1 of the law to state
that local administrations must consult with the parliament in
deciding areas for mining, Chief Judge Mohammad Mahfud said in
Jakarta. The article had dictated mining areas be decided by the
central government after coordination with local governments.

“To meet the democracy principles, local empowerment and
regional autonomy, it is fair that the local government has the
power” to decide mining areas, the ruling, obtained by
Bloomberg News, reads. The current regulation “is insufficient
to protect the constitutional rights and the regional authority
in determining policy on the natural resources in the region,
especially for minerals and coal.”

The ruling is the second success by local governments in
seeking bigger benefits from abundant coal, nickel and copper
resources, after the Supreme Court annulled some articles in
Energy and Mineral Resources Minister Decree No. 7, which is the
supporting rule for the mining law, including article 21 that
bans exports of mineral ores.

“By decentralizing the licensing power, the number of
decision makers will increase, coordination between parliament
and regencies or provinces will likely become more difficult and
time consuming,” Xavier Jean, Singapore-based associate
director of corporate ratings at Standard & Poor’s, said by e-mail today. “This could potentially reactivate the uncertainty
on the strength and quality of the mining licenses and
concession areas, keeps the risk of litigation well alive.”

Supreme Court

The Supreme Court verdict, which was made public Nov. 5 by
the Indonesian Chambers of Commerce and Industry, was based on a
request from the Regencies Government Association, or Apkasi.
Indonesia is the world’s largest exporter of tin and thermal
coal and the biggest producer of mined nickel.

Yesterday’s decision was based on a request from Isran Noor,
regent of East Kutai in East Kalimantan province, a coal
producing region. Noor is also the chairman of Apkasi.

“That is exactly what we want, because we’re the ones who
know exactly the resources in our region,” Noor told reporters
at the court after the decision was read. “After this, we can
resume issuing mining permits that were halted due to the
judicial review.”

The Ministry of Energy and Mineral Resources will study the
ruling, Susyanto, the ministry’s head of legal and public
relations, said at the court.

“We will study the verdicts and consult with other
ministries including the Law and Human Rights Ministry.”

BPMigas Dissolution

The Constitutional Court ruling came one week after the
court dissolved the country’s oil and gas regulator BPMigas on
the basis the agency’s role violated section 33 of the nation’s
constitution, which states resources are held by the government.

Indonesia will see similar challenges to resources-related
regulations in the future, because of successes with the mining
and oil-and-gas laws, said Luke Devine, foreign legal consultant,
finance and projects, at Hadiputranto, Hadinoto & Partners.

The court also ruled yesterday that Mining Business Areas,
or Wilayah Usaha Pertambangan in the Indonesian language, will
be designated by local governments, and signed off by the
central government, a reversal of the previous regulation.

Further Skepticism

WUP’s are mining areas in which sufficient geological data
have been produced on potential reserves. The ruling applies to
mineral and coal areas. The local administrations have also been
granted the power to set the acreage and boundaries of mining
concession blocks known as Wilayah Ijin Usaha Pertambangan, or
WIUP, in local language, also a reversal of the previous rule.

“The fact now that regional governments have been handed
the power to determine the WIUP areas is likely to give rise to
further skepticism from foreign majors,” Jakarta-based
Hadiputranto, Hadinoto wrote in a note to clients today.
“Regional governments may be tempted to divide up mining
concessions into smaller areas so as to make them attractive to
smaller local investors.”